JLN Options: The VIX and small caps in a mind-bending trade; Only a ‘black swan’ will bring back stock volatility; No time for complacency

May 19, 2014

Lead Stories

The VIX and small caps in a mind-bending trade
Michael A. Gayed – MarketWatch
I’ve been reading more and more commentary surrounding the so-called “fear index” of the stock market known as the VIX. There have been heavy sellers in the futures market, despite a lingering feeling that small-cap weakness is just the start of a much bigger correction for overall equities. Because the VIX ultimately responds to volatility in the S&P 500, the argument goes that small caps lead large caps lower, and a delayed reaction will soon occur.

Only a ‘black swan’ will bring back stock volatility
Wallace Witkowski – MarketWatch
Investors are becoming more accustomed to holding firm during market drops, making it more likely that it will take a true “black swan” event to usher in a return to stock volatility.
After a near 30% run-up in the S&P 500 Index in 2013, many strategists were calling for a return to volatility in 2014. Instead, the CBOE Volatility Index has generally held to low levels, with the occasional spike past 20, just like in 2013.

No time for complacency
Jeff Greenblatt – Futures
We are just a week away from Memorial Day. Aside from barbeques, trips to the lake and respect for our veterans, Memorial Day has a different meaning in our business.
First it means we are nearly through the first month of the ‘go away in May’ selling sequence for equities. It also gets us that much closer to the beginning of the peak of driving season for the oil market. Does every year follow form?

Volatility Breakout?
Cam Hui – Seeking Alpha
I’ve been seeing some odd and contradictory readings from the option market all week. One screams “fear” while the other screams “complacency”.
On one hand, the equity put-call ratio, which I highlighted on Sunday night (see Watch for the sentimental rally), remains elevated and is suggestive of a high level of fear. Such a condition is contrarian bullish for equities.

Turn Down the Noise When it Gets Loud
Bob Lang – CBOE Options Hub
Everyone has an opinion on the markets right now, especially around where they should (or will) go. I wish I had a dime for every reason or excuse the markets will go up or down, because I would have millions in the bank already. The pundits, experts, analysts and talking heads want to dazzle you with wild guesses, potential trends, relationships, and patterns that do not exist in order to get your attention.

ETF Chart of the Day: Writing Puts
Paul Weisbruch – ETF Trends
Since we are mired in a “low volatility” market at least as far as most conventional measures suggest and most pundits would agree, we might as well cover an ETP strategy that focuses on “High Volatility” at least as far as its strategy is concerned.
HVPW (U.S. Equity High Volatility Put Write Index, Expense Ratio 0.95%) launched in February of 2013 and has raised about $65.9 million since inception, averaging a good 79,000 shares or so, on a daily trading basis.

VIX Futures Speculators Raise Bearish Positions For Third Week
Zachary Storella – Investing.com
Large traders and speculators added to their overall bearish bets in the VIX market last week for a third straight week and to the highest level since September, according to the latest data from the Commodity Futures Trading Commission (CFTC) released on Friday.

Will VIX Expiration Bring Any Surprises?
Scott Murray – Seeking Alpha
The theories of the VIX being dead are everywhere. In fact, Marketwatch ran a headline story today, which claimed that the only thing that will rouse the VIX from its multi-year lows will be a “black swan event”. The article goes on to say that the Fed is the backstop for any rise in volatility.

The Great Volatility Shift
Exploring the current volatility backdrop
Adam Warner – Schaeffer’s Investment Research
Every Monday for the last few months or so, I’ve talked about the volatility and market action the week before. Or rather, the lack thereof.
But, as we hear more and more, there’s lots of volatility around — just not where we’re looking. The CBOE Volatility Index (VIX) proxies implied volatility on the S&P 500 Index (SPX), but it’s all Russell 2000 Index (RUT) these days, right?
OK, let’s take a look.

Videocast: 13 level targeted in VIX

Forex Outlook: Is Low Volatility Is Here to Stay?
Kathy Lien – BK Asset Management
Over the past month, we have seen all of the major currency pairs trade in increasingly narrow ranges and not only is this evident in the day to day movements of currencies but their option volatilities are also trading well below long term averages. The current volatility of 1-month EUR/USD options is approximately 5.8%, compared to a 5-year average of 10%. The current volatility for GBP/USD is 4.93% versus a 5-year average of 9.15% and for USD/JPY current volatility is 6.34% compared to an average of 10.59%.

Grain group urges pit trade halt if CME electronic platform crashes
Karl Plume – Reuters
CME Group should temporarily suspend open-outcry trading if its electronic trading platform crashes and reopen for a brief after-hours session if the system is restored later that day, a grain industry group said.
The call follows last month’s worst-ever outage on the world’s top agricultural commodities exchange.

Biggest 10 Banks’ Commodities Revenue Rises 26%
Maria Kolesnikova – Bloomberg
Commodities revenue at the 10 largest investment banks rose to a two-year high in the first quarter even as companies from JPMorgan Chase & Co. to Barclays Plc shrank operations, according to analytics company Coalition Ltd.
Raw-materials revenue at Goldman Sachs Group Inc., Morgan Stanley (MS) and the other companies making up the top 10 banks jumped 26 percent to $1.8 billion, the highest since the first three months of 2012, Coalition said in a report today. Only commodities showed growth as revenues in other areas from rates to emerging markets declined, the report showed.


Thomas Wittman Appointed Executive Vice President, Global Head of Equities –
Press Release (via MarketWatch)
The NASDAQ OMX Group, Inc. NDAQ +0.42% today announced that Thomas A. Wittman has been appointed Executive Vice President, Global Head of Equities, reporting directly to Hans-Ole Jochumsen, President, Global Trading & Market Services, NASDAQ OMX. Mr. Wittman will oversee the global cash equities and equity derivatives businesses. The appointment follows the recent announcement of Hans-Ole Jochumsen’s elevation to President, Global Trading & Market Services at NASDAQ OMX.

Regulation and Enforcement

U.S. court faults SEC trial strategy against broker, tosses verdict
Jonathan Stempel – Reuters
Faulting the U.S. Securities and Exchange Commission’s trial strategy, a federal appeals court on Monday overturned a jury’s finding that a former Prudential Securities broker committed civil fraud by rapidly trading mutual funds.


BATS Global Markets Provides EDGA and EDGX Full Market Depth Data to Bloomberg
Press Release (BATS)
Direct Edge, a BATS Global Markets Company, today announced that its EdgeBook Depth data feed, which provides full depth-of-book order information from Direct Edge’s EDGA and EDGX exchanges, is now available on the Bloomberg Professional service to subscribers of real-time U.S. Level 1 market data. BATS Global Markets’ BZX exchange data is already available to Bloomberg users.
EDGA and EDGX together serve as the transaction venue for more than 10 percent of U.S. cash equities trading and comprise the top exchange destination for retail order flow from the largest discount brokerage houses.
http://jlne.ws/1kiRNli (PDF)


Tail-risk hedging – Improving the return on capital
Eugene Dimitriou, Jeroen van Bezooijen, Pimco – Risk Magazine
The European Union’s Solvency II directive has required insurers to give even greater consideration to the capital they hold and the way in which they deploy it. In this sponsored feature, PIMCO experts Eugene Dimitriou, senior vice president, financial institutions group, and Jeroen van Bezooijen, head of Europe, Middle-East and Africa investment solutions, discuss the benefits of a holistic approach to tail-risk hedging and demonstrate how cost-effective hedging can improve returns on capital.


OptionsCity Charity Event and Texas Hold ‘Em Poker Tournament
OptionsCity Software
Thursday, May 29, 2014 from 4:30 PM to 9:00 PM (CDT)
Chicago, IL



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